In order to make the proposed Goods and Service Tax (GST) palatable to small businesses, the Union government is considering a GST rate much lower than the standard revenue neutral rate for businesses in the annual sales bracket of R25-75 lakh. This incentive is in addition to the total GST waiver for businesses below the R25 lakh annual sales threshold. Also under consideration is a 10-year moratorium on subsuming petroleum products in GST.

Sources privy to the development said the Centre’s proposals would be placed before states shortly.

The idea is to present the new indirect tax regime acceptable to a large number of small businesses and make it politically feasible, even as the Centre makes significant compromises on the design of GST to get states on board.

“The compounded GST rate that is lower than the standard rate will be applicable only on sales within a state by manufacturers, service providers and traders, all of whom will all be categorised as dealers. The special rate will not be applicable on inter-state transactions, however small the value may be,” said an official. The combined (Centre-state) revenue neutral rate of GST is likely to be around 16-20%.

The move is expected to benefit the services sector greatly. Now, service providers with an annual turnover of R10 lakh or more have to collect 12% service tax from consumers and pay it to the government. A service provider with R10 lakh turnover can expand sales by seven fold and still pay only the compounded (concessional) GST rate if the proposal goes through. There are 17 lakh service tax assessees now and a sizeable chunk are within the R25-75 lakh range. The exact number of assessees by turnover who may benefit from the nominal rate is, however, not immediately available.

Manufacturers, on the other hand, need to pay excise duty at present only if their turnover is above Rs 1.5 crore. As per the earlier proposal of having only a Rs 25 lakh threshold for all businesses to come under GST, more small manufacturers would have come under the tax net under GST. The lower GST rate will also bring relief for manufacturers in the Rs 25-75 lakh sales bracket as they would need to pay only a nominal amount of tax (not the full GST) in the new regime, as against nil now.